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Unformatted text preview: Problem 22 A. Incremental revenue $113,150 Incremental expenses: Driver (64,800) Operating (19,400) Depreciation Depreciation (12,560) $84,800 - $22,000 Income before taxes 16,390 5 Income tax expense (5,737) Net income 10,654 Add depreciation 12,560 Operating cash flows $23,214 B. Investing cash flows are all cash flows related to long term assets: Purchase of limo $(84,800) Residual value 22,000 All costs necessary to get the asset ready to use [$80,000+(80000*6%)] are included as part of the acquistion cost. 1-1-10 2011 2012 2013 2014 Annual operating cash flows $23,214 $23,214 $23,214 $23,214 Cost to buy machine $(84,800) Salvage value Net cash flows $(84,800) $23,214 $23,214 $23,214 $23,214 CF0 C01 C02 C03 C04 C. Time line: D. NPV $20,697 This investment will earn the company a return on its cash flows that exceeds its minimu IRR 16.77% This investment will earn the company roughly 16.77% return on its cash flows during ea E. This investment is expected to earn about 16.77 cents of cash flows out of every dollar of assets inveE....
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